KARACHI: The State Bank of Pakistan made a drastic cut off 100 basis points in the interest rate on Saturday to bring it to an eight-year low of 8.5 per cent for the next two months.

Announcing the monetary policy, SBP Governor Ashraf Mahmood Wathra gave a number of reasons for the interest rate cut, but the low rate of inflation was the main reason for the decision.

The central bank revised the estimated inflation for the current financial year to 4.5 -5.5pc against an annual target of 8pc.

Mr Wathra said some of the key macro-economic indicators had improved further since November. The CPI inflation and its expectations continue to follow a downward trajectory.

He described the fall in inflation as broad-based since both food and non-food inflation were declining. “The deceleration in the former is mainly the result of better supply conditions while the latter is explained by a combination of factors, including plummeting international oil price as well as decline in other global commodity prices; lagged impact of earlier conservative monetary policy stance and moderating aggregate demand; and stable exchange rate,” he added.

The SBP governor said although fiscal deficit had been contained, the expected shortfall in FBR revenue and higher security-related expenditures were still challenging for the government to meet the deficit target. “The containment of fiscal deficit is encouraging and bodes well for credibility of policies and continuation of official and private capital inflows.”

Although the trade deficit had risen in the first half of FY15 over the same period of FY14, it came down in November and December, he added. Moreover, considerable foreign exchange inflows had contributed to an upward trajectory in foreign exchange reserves.

Referring to the significant plunge in international oil prices, the central bank’s governor said through its expected favourable impact on trade balance, it brought about an improvement in the external sector outlook in recent months. “In addition to this, successful completion of the fourth and fifth review under the IMF programme and issuance of international Sukuk have also led to an improvement in overall balance of payments position. In effect, these developments have been instrumental in improving sentiments in the foreign exchange market and have supported SBP in its reserve-building efforts.”

With the IMF programme on track and expected proceeds from privatisation and official flows, the net SBP reserves are projected to rise further. “However, non-realisation of planned privatisation proceeds and lack of private inflows could yet be an obstacle in achieving a sustainable BoP position.”

Mr Wathra said the credit off-take by the private sector in the first half of the current financial year was not better than the same period of last year, but its momentum was likely to pick up with the realisation of the lagged impact of the last policy rate cut.

“This slowdown in credit growth could be attributed to both demand and supply side issues, such as weak corporate profitability of major industries till September 2014, shift in government borrowings away from SBP to commercial banks amid slower deposit growth, challenging security situation, falling commodity prices, and continued energy and gas shortages for the industry.”

Ashraf Wathra said the continued decline in inflation retained scheduled banks’ appetite for investment in long-term securities in the second quarter of FY15 as the expectation of further cut in interest rate strengthened. The realisation of expected external inflows was likely to reduce the budgetary borrowing requirements from scheduled banks and improve liquidity conditions in the money market, he added.

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